Global markets return to fuller trade on Wednesday following the Tuesday holiday session in many countries. Overall, there has been no real change to the familiar ranges, and volatility remains at exceptionally low levels. The Euro has mostly been locked in tight consolidation above 1.3000, while even the recently wilder Australian Dollar has resigned itself to quieter trade following a surprising 50bp RBA rate cut which resulted in an immediate +1% decline on Tuesday. Some solid ISM manufacturing data out of the US has helped to keep equity markets propped for now, and US stocks are very close to retesting their yearly highs from March. Still, we feel there is an eeriness in price action that could be likened to calm before the storm.

Things have been almost too quiet, and we suspect that there will soon be a new catalyst that sparks a major pickup in volatility and opens a clearer direction in the FX markets. Perhaps, today’s much softer round of European PMI data and weaker German employment results will get things going, but at this point, it is still too early to tell. Given where most currencies are currently trading, we suspect that the breakout will be in the US Dollar’s favor, with most currencies currently trading by some key resistance against the buck. We also suspect that the flip-flopping on views over additional Fed QE implementation, will soon reverse back to a no additional QE consensus (has most recently been more QE positive), and this could indeed open a more substantial rally in the Greenback. Fundamentally, despite the latest bounce in the Euro, there has been nothing too compelling to actually justify the moves, while technically, the moves are still classified as normal corrective action within a broader Euro downtrend.

Other currencies like the Pound and Canadian Dollar have also been very well bid against the US Dollar, but here too we see risks for reversal, especially in light on some softer economic data out of both economies. Meanwhile, the Yen and Aussie also look exposed to weakness against the buck in our view, as here, yield differentials and monetary policy outlooks and actions do not favor strength in these currencies. As mentioned above, the RBA has finally come to its senses after reacting more appropriately to the global macro slowdown with a 50basis point rate cut, while the Bank of Japan continues to expand its monetary easing efforts. Economic data out of the US has also been quite solid, and the more this fact materializes, the greater the chance for a more aggressive push back into the US Dollar. Friday’s monthly jobs report will therefore be a significant data release this week, and we suspect that the buzz and anticipation around this event will escalate over the coming sessions. The softer European data on Wednesday also will put more pressure on the ECB at their meeting tomorrow, and could also influence the direction in currencies.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Overall, the market remains locked in a very tight directionless, choppy consolidation. Ultimately a break back above 1.3500 or below 1.3000 will be required for clearer directional bias. At this point, the market has stalled by some key resistance just ahead of 1.3300 to once again put the pressure on the downside towards the multi-day range lows down by 1.3000. Only back above 1.3500 would negate outlook.

USD/JPY: The latest pullback from the 2012, 84.20 highs is viewed as corrective and it looks as though the market could still see a bit more weakness before considering the possibility for the formation of a medium-term higher low. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate.

GBP/USD: Although the market had been very well bid in recent sessions, the rally looks like it might finally be closer to stalling out in favor of a bearish resumption. Look for a daily close back below 1.6150 to officially confirm, but aggressive traders may want to consider fading any strength beyond 1.6300 with daily studies starting to roll from overbought. Ultimately, only a daily close above 1.6400 would delay outlook.

USD/CHF: Our core constructive outlook remains well intact with the latest setbacks very well supported by psychological barriers at 0.9000. It now looks as though the market could be looking to carve a fresh higher low, and we will be looking for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should then accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.